U.S. Natural Gas Rig Counts Have Bottomed - There Is Growth Ahead For Drillers

US natural gas Nymex futures prices started falling from a summer of 2011 high of about $5/MMbtu until they bottomed at about $1.90/MMbtu in the spring of 2012. US natural gas Nymex futures prices have since risen to about $3.80/MMbtu as of this writing, Thursday March 14, 2013. The reasons for the fall were twofold. First, all of new unconventional oil and gas fields in the late 2000's brought on a huge "gold rush" to profits. As more and more of these fields became big producers of natural gas, US natural gas prices weakened. When the winter of 2011-2012 was an unseasonably warm one, natural gas prices started plummeting. As this happened many oil and gas E & P companies cut back on their natural gas drilling. For instance, Chesapeake Energy's (NYSE:CHK) natural gas drilling is now only about 10% of what it was a few years ago. Most did not cut back this drastically. However, the cutbacks were huge. The chart below shows the US rig counts over the last two years.

The gray bars show the ramp up of the previous year (2011-2012). The red line shows the fall in US gas dedicated rig counts from early 2012 to present. It is apparent that the rig count has bottomed. Since most of the fall in US rig counts was in natural gas rig counts, it is particularly instructive to look at those figures. For Q4 2012 the average number of natural gas rigs active in the US was 423. For Q1 (QTD) the average number of gas rigs active in the US was 427. This amounts to virtually no change quarter over quarter.

The number of active oil rigs decreased a small amount during the same period. However, that is more likely due to seasonal factors than to anything else. Some oil fields are located in harsh winter climates; and last year was an unseasonably warm winter. The number of horizontal oil rigs in use in the US actually rose slightly during that period. Looking forward I expect that the number of oil rigs active in the US will start to rise again as new oil fields such as the Utica ramp up their exploration and development activities. This link lists many of the oil and gas shale fields in the US and Canada; and even it is incomplete. There are a lot of relatively new fields. Plus with the rebound in natural gas prices, we may see a small rebound in natural gas drilling.

During February, the number of internationally active rigs was 1275. This was up +71 from the prior year. It was down only -4 from the prior month. In sum it would appear that the number of international rigs may also be set to climb in 2013. There are huge new international land based fields such as the Cooper Basin in Australia and the Vaca Muerta in Argentina. Then there are many new hot offshore spots such as offshore Africa (offshore Ghana, Nigeria, and Angola are a few), offshore Brazil, the Bering Sea, the Arctic, and offshore Asia. Since it is the emerging market economies that are growing quickly, it makes sense that drilling activities for oil and gas in their geographic areas would increase to feed their growing energy appetite.

Schlumberger (NYSE:SLB) has a historical and near term expectations forecast chart of the growth in the deepwater market. The chart speaks for itself.

(click to enlarge)

On top of these factors, fracking is becoming an ever more important part of the completion process; and there are increasingly more frack stages being done. Hi-tech multi-stage fracking pioneer, Packers Plus, says it can do 60 fracks with its latest technology. President Dan Thermig recalls that when he started you could only do five frack stages. More frack stages are normally associated with a greater percentage of recovery of the total oil in place in oil shale. As a ball park figure, one fracking stage costs about $100,000. When companies now do 30+ fracking stages in some cases, the revenue from fracking alone can be a significant part of the development cost of an oil shale well. This ultimately means revenue growth for oil services companies. Some suggest that pure fracking companies are the best oil and gas development area to be in as they are the fastest growing.

The oil service drillers that perform more services in more of these areas are going to be the ones that benefit the most in the next year. They will get incrementally more business due to their reputations and their greater expertise. One of these, Halliburton (NYSE:HAL), will get incrementally more business because of its reputation for "green" drilling and completion (fracking). In fact HAL won 2012 World Oil Awards for (1) "Best Health, Safety, Environment/Sustainable Development Onshore" and (2) "Best Visualization and Collaboration". It was nominated for eight other awards. These included: Best Completion Technology (EquiFlow AICD, TergoVis I Efficiency Fluid, and Access Frac PD Service), Best Deepwater Technology, Best Drilling Technology, Best Drilling and Completion Fluids, Best Well Intervention, and New Horizons Idea.

HAL has recently partnered with Great Bear Petroleum, which is currently a private company, to help Great Bear Petroleum develop its new leases on the North Slope in Alaska. It is no accident that Great Bear Petroleum, which has to deal constructively with the influential environmental groups in Alaska, chose HAL to partner with. Great Bear's drilling areas are near the Arctic National Wildlife Refuge. Therefore they draw a lot of environmentalist attention. For those interested in Great Bear Petroleum keep your eyes peeled for an IPO in 2013 or 2014. The company seems almost sure to go public in order to finance its anticipated ramp up in drilling in 2014.

HAL is not only an unconventional shale oil services provider for land based fields; it also provides services for deep sea drilling and completion. Plus it is so sure of future success that on February 20, 2013 its board approved a 39% increase in its dividend to $0.125 per share for Q1 2013. This still only leaves HAL with approximately a 1.2% annual dividend; but such a significant raise bodes well for HAL to eventually become a significant income producing stock. It also has an existing $1.7B stock buyback program in place, which it just commenced executing. This tends to make one believe that its board does not believe the stock is going to get demonstrably cheaper in the near future. Both of these items bode well for stock price gains over the next few years.

HAL is a well run company. It has a history of meeting or exceeding earnings expectations. The average analysts' next five years EPS growth per annum forecast is for 16.39% growth per annum. It trades at a bargain FPE of 10.74 for its expected growth. It carries a mean analysts' recommendation of 1.9 (a buy).

Another company in much the same situation as HAL is Schlumberger. SLB is a technological leader just as HAL is. It provides expertise in virtually all fields. It is renowned for its seismic and interpretation technology as well as its drilling efficiency. Its new HiWAY fracking technology allows the use of significantly less water and proppant with superior results.

SLB too has a history of meeting or exceeding its earnings expectations -- the mark of a well run company. It pays a dividend of about 1.6%. It carries a bargain FPE of 13.46 for its high next five years analysts' average EPS growth per annum estimate of 16.99%. It has a mean analysts' recommendation of 1.7 (a buy). It has a long and usually well deserved reputation of being a leader in the industry. Both SLB and HAL are buys for many of the same reasons.

The two year charts of HAL and SLB provide some technical direction for these trades.

The two year chart of HAL is below.

(click to enlarge)

The slow stochastic sub chart shows that HAL is neither overbought nor oversold. The main chart show that it has recently begun what I think will be a long term uptrend. Its 50-day SMA is far above its 200-day SMA; and its price line is above its 50-day SMA. It is technically and fundamentally a buy.

The two year chart of SLB is below.

(click to enlarge)

The slow stochastic sub chart shows that SLB is neither overbought nor oversold. The main chart shows that SLB seems to be breaking out of a long consolidation period. It has started a new uptrend. Its 50-day SMA is above its 200-day SMA. Its price line is above its 50-day SMA. It is technically and fundamentally a buy.

You can go into much more depth in the accounting aspects of these companies; but you will only find that the overriding fundamentals are the most important aspect of their future, along with their reputations for technical expertise, safety, and efficiency. They are buys. However, you also want to remember that the overall market is likely near a top. Many are forecasting a significant pullback soon. The strong possibility of a US recession is looming on the horizon. It makes a lot of sense to average into these stocks over the course of 2013.

NOTE: Some of the fundamental financial data above is from Yahoo Finance.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HAL, SLB over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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